Citigroup To Pay $2.65 Billion In WorldCom Fraud Settlement

By Gretchen Morgenson

The New York Times -- NEW YORK

Hoping to close the books on its role as lead banker to WorldCom, Citigroup agreed Monday to pay $2.65 billion to investors who bought stock and bonds in the telecommunications giant before its bankruptcy filing two years ago.

The payment is the largest ever by a bank, brokerage firm or auditor to settle a fraud case brought by investors who bought securities issued by a corporation that was advised by the one of those firms. It is the second-largest amount ever paid to settle a securities class action, trailing Cendant Corp.’s payment of $2.85 billion in 2000.

The Citigroup settlement, which must be approved by the court, came just hours before an appellate court was to hear arguments addressing among other things, the conflicts between the firm’s stock analysis and the investment banking fees generated by WorldCom. The Securities and Exchange Commission had filed a friend of the court brief supporting the investors’ claims.

Litigation continues against the defendants: WorldCom’s former officers and directors, other banks and brokerage firms that sold WorldCom securities, and Arthur Andersen, the company’s auditor at the time.

Tens of billions of dollars in investor wealth vanished when WorldCom collapsed in July 2002, and Monday’s settlement is the first indication of how much money may yet be paid by the people and firms that helped the company sell its securities to investors. In 1999, when the stock was at its peak, WorldCom had a market value of more than $150 billion.

“This settlement, while historic, is only the first step,” Hevesi said. “We will continue to pursue our claims against the others who bear responsibility for the debacle at WorldCom. The investing public depends on the gatekeepers, and the gatekeepers have to be diligent in making sure investors get accurate and truthful information. They should understand that this settlement conveys a message that reinforces their obligation.”